On February 15, 2023, the Securities and Exchange Commission (SEC) proposed amendments to rule 206(4)-2 (the custody rule) of the Investment Advisers Act of 1940 (SEC Proposal) and provided a fact sheet for reference. The SEC refers to their proposed changes as the Safeguarding Rule.
The SEC Proposal affects all registered investment advisors (RIAs) and, among other changes:
- Expands the custody rule beyond client funds and securities to apply to all client assets, explicitly including “crypto assets… financial contracts… artwork, real estate, precious metals… physical commodities”
- Amends the definition of qualified custodians, which generally include banks, broker-dealers, and certain other regulated entities
- Requires that RIAs only use qualified custodians for custody of client assets
- Expands the definition of custody to include discretionary authority to trade, and potentially mere access (if access provides the authority to change the beneficial ownership of those assets)
- Requires qualified custodians to provide certain standard custodial protections, including (1) maintaining possession or control of client assets and (2) holding client assets in segregated accounts to protect from custodian bankruptcy or insolvency
- Increases recordkeeping requirements
The SEC Proposal is open for comment until May 8, 2023, though many have asked for an extended comment period to assess the full impact on RIAs. Sullivan & Cromwell LLP has also provided additional analysis in a detailed legal memo regarding the Proposed Safeguarding Rule here.